Cryptocurrencies are going to be an increasingly important part of our future, and it’s important to develop a habit of securing your digital assets properly and knowing what to do if a device fails, or if it’s stolen. To help you navigate the options and some of the confusing jargon that comes with them, we have put this guide together.
Bitcoin and other cryptocurrencies allow for the decentralization of the entire financial situation. One of the consequences of that is that you get to be your own bank. Rather than letting a bank look after your money – and charge you a fortune for doing so – you can look after your own crypto assets. But that also means you must take responsibility for the security of your digital currencies.
Unfortunately, there are dishonest people out there doing everything they can to get hold of your wealth. As more people are buying and storing cryptocurrencies, hackers have more incentive to try to hack every device they can to steal those digital assets. They are also becoming more sophisticated over time.
All this means you need to take secure storage of your digital assets seriously. It also means that whatever method of storage you decide on, you need a backup of your wallet, and you need to know how to recover your wallet.
Cryptocurrencies are going to be an increasingly important part of our future, and it’s important to develop a habit of securing your digital assets properly and knowing what to do if a device fails, or if it’s stolen.
To help you navigate the options and some of the confusing jargon that comes with them, we have put this guide together.
First, let’s define some of the key terms you will come across when you buy, sell or store Bitcoin:
Wallet: A wallet is used to store private and public keys. A wallet can be compared to a bank account, a credit card, or even the wallet in your pocket. However, unlike these, a crypto wallet doesn’t actually store your Bitcoin, but rather the keys you use to access your Bitcoin.
Public Key: A public key is like a bank account number. This is the address another sender will use to send Bitcoin to you.
Private Key: A private key is required to access your Bitcoin. In order to send Bitcoin from your wallet, you will require the private and public keys.
Software wallet: A software wallet is a wallet that you download to a PC, notebook, or mobile device.
Popular Bitcoin Software Wallets include:
Hardware wallet: A hardware wallet is a device similar to a USB stick that allows you to store your keys offline.
Popular hardware wallets include: Trezor, Ledger Nano S, KeepKey
Hot wallet: A hot wallet is any wallet that is online. This can be a software wallet on your own devices, or a wallet hosted on an exchange or elsewhere in the cloud.
Cold Wallet: A cold wallet is an offline wallet. Cold storage means either keeping your keys on hardware wallet or printed on a piece of paper, stored in a safety deposit box or hidden somewhere.
Backup: A backup is a file containing your private and public keys which will allow you to restore your wallet if you lose a device or if your hard drive is damaged.
Your choice of wallet comes down to the trade-off between security and convenience. The easiest way to store Bitcoin is on an exchange. However, this is also the least secure method. When your cryptocurrencies are stored on an exchange, you do not have control of your keys. If the exchange is hacked, the hackers can steal the assets belonging to all the exchange’s clients, including yours.
At the other end of the spectrum are hardware wallets and paper wallets. If your assets are stored offline, hackers can’t get hold of them. But this also means you need to take full responsibility for storing your keys where nobody can get them.
If you own very little in the way of Bitcoin, an exchange is probably the way to go. If losing your Bitcoin would be a big problem, a software wallet is a better option. And, if your crypto assets are worth a considerable amount, you’ll want to keep the bulk of those assets offline, either on a hardware wallet, or a securely stored paper wallet.
One of the disadvantages of decentralized ledgers is that you cannot retrieve a lost password. If you lose the password to the website, or if you forget the PIN code for a bank account, there is always a way to reset that password.
Public keys are like a bank account numbers on a blockchain, and private keys are the passwords to access those accounts. The problem is that if you lose either, there is no one to turn to. If you lose the device that stores those keys, they are gone forever, and so are your Bitcoin. Therefore, you must always back up your wallet.
There are several ways to back up your wallet, the following being the most popular:
Seed phrase: Most wallet software does include a recovery process. The software will generate a seed phrase, which you need to write down and store somewhere safe. If for whatever reason, you lose your wallet, you can use this phrase to recover it.
A seed phrase will look something like this:
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The words need to be in the exact order they are generated. For most wallets, if you lose your password, it cannot be recovered or reset, however, if you do lose the password, you can recover the wallet using the seed phrase.
Text File: Software wallets have a function that allows you to export your keys. On some wallets, the function is labeled backup wallet, while on others it is labeled export keys. When making backup files, it’s a good idea to disconnect your computer from the internet before doing so.
On the Electrum wallet, the function is under Wallet > Private Keys > Export and looks like this:
Once you click on Export, you will be able to choose between a CSV file or a JSON file, and then choose the drive to send it to.
The file that will be generated is a text file containing all your public and private keys. Remember that once you have that file on your computer, anyone who has access to it has access to all your Bitcoin. As soon as you have created a backup file you should move it somewhere secure, encrypt it (see below), or delete the contents of the file. If you delete the file, go to your Recycle Bin and delete it there too – that’s one of the first places hackers will look for valuable information.
Copy Wallet.dat Files: The other way to make a digital copy of your wallet, is to copy the file the wallet uses to store the keys. Each software wallet stores the file in a slightly different location on your PC, so look at the documentation to find it.
The Electrum wallet stores this file on Windows as follows:
\Users\YourUserName\AppData\Roaming\Electrum\wallets (or %APPDATA%\Electrum\wallets)
For Apple and Linux operating systems you can search for: ~/.electrum
You will probably have to make sure hidden files are being shown to find it.
Paper Copy: One of the safest ways to store your keys is to make a paper copy. Disconnect your computer from the internet and print out the file. Then cover the paper with foil (so it cannot be viewed against a light source), and seal it in an envelope. This should be hidden somewhere, or stored in a safety deposit box or a safe. Once you have done this, remember to delete the file you printed from your computer
If anyone can open a digital backup file, they have access to all your keys, and therefore all your Bitcoin. For this reason, it’s a good idea to encrypt the file with a password.
When it comes to encrypting a file, there are several options. Most operating systems have a built-in encryption function that is secure enough for most people’s needs.
If you want to use the best encryption possible you can download encryption software from VeraCrypt, AxCrypt or a similar provider. This software allows you to choose between several methods of encryption. You can usually choose between 128 and 256-bit encryption and you can to use two-factor encryption too.
If you have made a digital backup file (preferably encrypted) you will need to store it somewhere. There are a couple of options for storing these files. Remember, there is little point keeping this file on the same devices as the device with the original wallet on it.
You could store it on another PC, notebook, or even a mobile phone or tablet. Or you can store it on a USB drive, but not if you are likely to lose the drive. The safest way to store a backup file is on a USB drive in a safety deposit box at a bank, or in a safe.
Digital backup files can also be stored using cloud storage services like Dropbox, One Drive, and others. Some people are skeptical of the level of security offered by the most popular cloud services, so make sure you encrypt files before sending them to the cloud.
Restoring a Bitcoin wallet is easier than it sounds. If you have a seed phrase, you can simply use the ‘Restore’ function. Even if your device is lost or stolen, you can download a new wallet on another device, and restore it using the seed phrase.
Simply look for the ‘Restore’ function in the menu, and follow the instructions.
To restore a wallet using the wallet.dat file, simply replace the default wallet file on your computer with the backup file you made. It’s as simple as that.
If your backup file is a text file, you will need to log into the wallet interface, create a new wallet, and then copy and paste the keys from your backup text file. Again – it’s as simple as that.
There’s one last thing to consider. Another challenge that cryptocurrencies have introduced is inheritance. If, or rather when, we die, if no one else has access to our Bitcoin, it’s impossible for them to be passed on to our heirs. Even if you explicitly state in your will that you are leaving your crypto assets to a spouse or child, without access to your keys, they will have no access to your digital assets.
There are several ways to make sure your heirs can access your private and public keys. Here’s a relatively simple solution: Create a simple text file with all your keys on them. Put the file in an encrypted, password-protected file on a USB stick. Use a different password from all your other passwords for this. Then give the USB stick to a family member and ask them to keep it somewhere secure. Finally, include the password for the file in your will, a copy of which is kept with your solicitor. When you die, the password will be given to your family, and they will have access to the file on the USB stick.
There are two important aspects to remember about storing your Bitcoins. Firstly, you and you alone are responsible for making sure your crypto assets are safe and that they can’t be accessed by hackers. And secondly, if you are securing your assets properly, there is no password recovery option – if you lose your wallet or access to it, your Bitcoins are gone forever.
For this reason, it’s is important to have a process to both secure your keys using a wallet AND backup those keys. Even if you don’t yet have a large Bitcoin holding, it’s worth getting into the habit of doing this thoroughly. Cryptocurrencies will play an increasingly large role in our lives in the future, and storing them properly will only become more important with time.
Richard has over 18 years’ experience in asset management, stockbroking, financial media and systematic trading. He covers global equities, crypto assets, ETFs, currencies, and indices.
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